SMUD’s low-carbon plan would protect consumers

With climate change moving to center stage in Washington D.C., SMUD is shopping a proposal that would give electric utilities flexibility in reducing greenhouse-gas emissions to minimize the sticker shock for their customers.

SMUD’s proposal for a low-carbon diet – known formally as the Low Carbon Electricity Framework, or LCEF – went to Capitol Hill and utility board rooms across the nation in February.

“Our overarching concern is to do the right thing for the environment and at the same time protect our customers from excessive and unnecessary costs,” said SMUD General Manager and CEO John DiStasio. “We want to reduce emissions at the lowest possible cost to consumers and the U.S. economy.”

Avoiding pitfalls

SMUD would like to see a system that avoids both rigid energy-resource mandates, such as a one-size-fits-all renewable portfolio standard, and an overly expensive cap-and-trade program.

SMUD’s proposal endorses the goal of major, long-term reductions in greenhouse gas emissions. And it embraces the “cap and trade” concept, which would allow companies that can’t live within their allotted emission limits to buy emission credits.

But instead of creating a free market for the sale of credits, SMUD favors a system in which emission allowances are allocated for a small fee rather than auctioned off to the highest bidder. Companies would be allocated the right to purchase a certain amount of allowances at a fixed but gradually increasing cost, raising revenue that would be invested in clean infrastructure.

Companies that can’t live within their allocation limits would be able to buy extra emission credits from those who were able to reduce emissions and thus have extra credits to sell. This would provide incentive for emission reductions, and raise the revenues needed to transition to cleaner energy without exposing consumers to the kind of market manipulation that occurred during the California energy crisis of 2000-2001.

Local control

SMUD’s plan also advocates that retail providers of electricity – primarily utilities – be the “point of regulation” responsible for reducing emissions. Furthermore, SMUD wants a system that allows the retail electricity providers to choose the degree to which they will utilize individual tools – renewable energy, energy efficiency, demand response programs – to reduce emissions.

“It makes sense for us as retail providers to be responsible for reducing carbon emissions because we are in the best position to reduce emissions and make cost-effective choices for doing so. We are also in the best position to work with consumers and help them change their energy habits,” DiStasio said. “It makes sense to let each utility decide which emission-reduction tools will be most cost-effective for their customers based on each utility’s circumstances and resources.”

If, as some have proposed, the country were to regulate electricity generators instead of retailers, carbon reduction will cost consumers far more. That’s because generators will have no incentive to hold down the costs of compliance. Companies that own generation will naturally seek to maximize profits from the trading of emission credits and will pass along the costs to retailers and consumers without consequence.

Circulating the proposal

SMUD recently sent a letter from DiStasio, along with a description of SMUD’s proposal and a set of FAQs, to chief executives for utilities that belong to the American Public Power Association (APPA), the Large Public Power Council and the Northwest Public Power Association. In late February, during APPA’s annual “legislative rally” week, DiStasio, four directors and other SMUD representatives discussed the proposal in Washington with Rep. Doris Matsui, Rep. Dan Lungren and key congressional staffers.

Though a federal plan for addressing climate change now seems inevitable, DiStasio said Congress does not yet appear to be close to a consensus on exactly how to reduce GhG emissions.

“Given the diversity of the U.S. energy supply, which is very much a geographic issue, I think the flexibility to address opportunities and system characteristics at the local level appeals to people,” DiStasio said. “Once negotiations start, I think our proposal will gain some traction.”